Level II Trading

Discussion in 'Order Execution' started by gkadir, Mar 9, 2006.

  1. gkadir

    gkadir

    Hello Fellow traders,

    I wanted to ask your experiences in using Level 2 for trading stocks. I am trying to use it to reduce the risk at my entries, but I have find it very misleading sometimes.

    We know that when there are a lot of Bids the price is likely to go up and if there is more orders on the offer the price is likely to go down.
    I recorded the level 2 screen from my desktop. I found to my surprise on many ocasions that when at critical support or resistence level, despite there being more orders on the bid, the price goes down vice versa when the price is at major resistence.

    Its like if there is more orders on the bid the price goes down. If there's more orders on the offer the price goes up.

    I am really confused. Can anyone enlighten me with thier experiences why this is, and how and where I can learn to read the level 2 order book more effectivly.

    Thank you in advance for your time.
     
  2. This is false. Visible bids and visible offers dont necessarily mean that the stock price will move in the anticipated direction. If it were as easy as you explained it, everyone would be super rich, there would be no skill involved in trading. The key is to understand if these bids represent passive buyers or aggressive buyers and vice versa. Are these bids there to push the stock up or be taken out by sellers propelling the stock lower? Figure this out consistently and you'll make a nice income.

     
  3. BDGBDG

    BDGBDG

    Steve, can you expand on what you just wrote. Are you familar with the Flipper? Didn't he make a nice living using the same deception you speak of, i. e representing like he was going to buy or sell than "flipping" his order.
     
  4. gkadir

    gkadir

    Steve, Thanks for the correction.

    I think I need to do more recording. Any heads up way to figure out what you said? I don't find any decent level 2 books, thats why I went to record it.

    Thx
     
  5. JORGE

    JORGE

    This will probably sound crazy to most people on here, but you might try trading for a few days without looking at level 2.

    About 85% of my trading is on Nasdaq and I never look at L2. On my primary quote screen I only show last trade, my trading platform shows bid/ask and size, but no L2. This simplifies things and allows me to focus solely on price and the relative strength or weakness of a particular stock.

    To reduce the risk of my entries I look for stocks consolidating around S/R and enter before the break occurs. If I'm not in when the break occurs I will wait for a retracement to enter the trade. I find chasing breakouts or breakdowns is the quickest way to lose a lot of money.
     
  6. This is a very common tactic, hell I use it quite often too. I see specs/floor traders work orders like this all the time. It takes a trained eye to know when a bid is real or when its just there to temporarily move the market in one direction to get daytraders to fill them on the opposite side. Its really a true art when done right :)

    Just remember, usually when things look too good to be true (ie bids lined up and no offers in sight or vice versa), its usually time to think about an exit strategy. Its just the nature of trading.

     
  7. ....it is my understanding that Level II became semi-useless once it was released to the open public. it is now just another pump-and-dump brought to you by the wall street promotional machine (like Steve said, it can almost serve now as a contrarian indicator) if i'm wrong about this, please let me know
     
  8. gkadir sterts the thread with:

    "I found to my surprise on many ocasions that when at critical support or resistence level, despite there being more orders on the bid, the price goes down vice versa when the price is at major resistence.

    Its like if there is more orders on the bid the price goes down. If there's more orders on the offer the price goes up.

    I am really confused."


    He gets this response from Tvardek:


    "This is false. Visible bids and visible offers dont necessarily mean that the stock price will move in the anticipated direction."

    then we read:

    "Steve, Thanks for the correction."

    Steve amplifies his understanding of his position that is contrary to gkadir by saying:


    "This is a very common tactic, hell I use it quite often too. I see specs/floor traders work orders like this all the time. It takes a trained eye to know when a bid is real or when its just there to temporarily move the market in one direction to get daytraders to fill them on the opposite side. Its really a true art when done right."


    Two months pass... and we hear from FS.

    "....it is my understanding that Level II became semi-useless once it was released to the open public. it is now just another pump-and-dump brought to you by the wall street promotional machine (like Steve said, it can almost serve now as a contrarian indicator) if i'm wrong about this, please let me know."

    March came and went then a May post arrives.

    So the thread initially died because two people more or less reached a mythical agreement. The myth prevailed and two months later the myth is substantiated and a little tweak is added: ....if i'm wrong about this, please let me know.

    Steve tells gkadir he is wrong and this is because of the "anticipated direction" Steve bases his "you are wrong" upon. The confirmation of the same view by FS is borne out with the comment: "it can almost serve now as a contrarian indicator"

    FS you are wrong. So is your buddy Steve.

    I regard gkadir as a person who is "seeking" He simply is making a comment that is his analysis of many observations that are consistent.

    My response to this group of people is one made before that drew a comment: "Jack started to tell us a story but never finished it". I did finish and it was not understood. That is par for the course re: me and my comments.

    Why did gkadir draw the right conclusions and say he was confused and why did Steve and FS get caught in the trap of this market myth?

    They did it all for the same reason.

    This myth of the markets could be named the democracy myth. Or the voter's myth.

    Steve, FS and gkadir are all playing the numbers game as usual. The market is following the rules of the market game. The two activities are the opposite of each other.

    If you believe the myth that people promulgate, you get to not make much money. If you obey the market's rules and ways you get to make as much money as is offered when you become effective and efficient.

    gkadir is gradually moving away from the reality of what the market actually does to the places where Steve and FS are sitting being wrong as a consequence of using the mythical party line.

    Why cannot gkadir go through the process of figuring out what is going on?

    Why do Steve and FS embellish their misunderstandings with "stories"?

    The tree for learning about the market's operations has many branches most of which head out to Myths at their ends. A person out there can fall off after a while and go climb the tree again and not get stuck sitting on the mythical branch.

    Why do Steve and FS sit on the branch and talk to a person on the trunk asking questions? They "know" the myth. They are teaching it to others.

    In a democracy the majority rule. We all know this and Steve and FS "anticipate" the majority ruling or from the "contrarian" view think the opposite. Both are the same view.

    What if gkadir had just posed his two concerns in another way? Other than the "democracy" orientation? I mean he did come up with two concerns that covered both directions of the market and he made the correct observations of the consequences of the concerns. Man, this is thinking and being rational at its best but he actually caved when a myth was presentede to him by someone sitting way out on the branch of a tree.

    A lot of people climbing the tree go to the branches and sit around the myths.

    The query:

    At critical support,

    If there are more orders on the bids, then the market goes down.

    Or at critical resistance,

    If there are more orders on the offer, then the market goes up.

    Trading at the limits of the range is being described. A lot of people want to buy at support it looks like. It looks like a lot of people want to sell at resistance.

    This is the admonition to buy low/sell high being monitored by gkadir.

    Who controls the market at Support?


    Who controls the market at Resistance?

    Are any of these people showing on the level 2 or DOM?

    How could they be??


    The lesson learned at a given height on the trunk of the learning tree that enables you to climb higher instead of going and sitting on a branch.

    By reasoning through to being able to see what is going on, you often get to see how the market works.

    [color=blueSo where does gkadir go to observe what he has not seen so far?[/color]

    Cool. As he sees this going on, his questions that arose by looking at level II are answered and he is ready to proceed with his next challenges to become more effective and efficient.

    What about all the people in the branches sitting in mythville?

    That is a tough situation for most people. A person sitting on a branch is stuck as far as learning to make more money faster. That takes recognizing that thecequity curve is stuck at the same slope and the slope is less than the slope of what the market is offering.

    What do people way up the tree make?

    What do they know? One thing they know regarding the myth presented by other in this thread is that the myth does not work. What proves it does not work is gkadirs observations that started the thread. Those, observations are not a sufficient proof, however. The additional observations at the place where they occur are what allows for a disertation on debunking the myth.

    Here come the flamers....lol.......
     
  9. My original post was from my perspective as a daytrader only, I should have clarified that. Now, I know that my job to the market is to provide liquidity, and for providing that liquidity, I get the opportunity to benefit from fluctuations in price. Unless a bid or offer is aggressively moving up or down, MOST of the time a seller will find his way to wipe out a stale bid or a buyer to take a stale offer. What I think the original poster was asking was why it seemed that the stocks moved opposite than he anticipated based on the "market depth". My answer was strictly based on the shortest time frame. I think that traders who trade on an intraday basis will get to know that when a trade looks too good to be true (lots of bids lined up or offers lined up), it usually is and the stock reverses.
     
  10. You arewrong on this level as well.
     
    #10     May 8, 2006